At the end of each year a person deposits $1,500 in a retirement account that ea

Question

At the end of each year a person deposits $1,500 in a retirement account that earns 10 percent annually.

How much will be in the account when the individual retires at the age of 65 if the contributions start when the person is 45 years old?

How much additional money will be in the account if the individual stops making the contribution at age 65 but defers retirement until age 70%?

How much additional money will be in the account if the individual continues making the contribution but defers retirement until age 70?

Compare the answers to (b) and (c). What is the effect of continuing the contributions? How much is the difference between the two answers?

Explanation / Answer

A) Amount earned is 1500 + 1500 * 1.1 + .... + 1500 * 1.1^19 = $85,912.50

B) Amount earned is 85912.50 * ( 1.1^5 ) = 138,362.94

C) Amount earned is 1500 + 1500 * 1.1 + .... + 1500 * 1.1^24 = 147,520.59

D) Difference is 147,520.59 - 138,362.94 = 9,157.65. The effect of continuing the contributions is extra 9,157.65

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